Retail sales shrank in lead-up to Christmas

Retail sales shrank in the lead up to Christmas, but the news was better for fashion and department stores.

Bureau of Statistics data for December showed sales across all retail sectors fell 0.2 per cent, seasonally adjusted.

The result disappointed analysts, who had expected sales to climb a modest 0.3 per cent.

However, the disappointing overall figures masked an improvement for some sectors that have been struggling in recent times.

Footwear and personal accessory retailing led the gains, with a 4.2 per cent rise, while clothing turnover climbed 1 per cent.

The gains in these areas flowed through into department store sales, which increased 0.8 per cent, seasonally adjusted.

The long suffering electronics retail sector also had a small pre-Christmas gain, with sales rising 0.2 per cent.

Hardware, building and garden supplies was another sector that had a strong December, up 2.1 per cent.

However, the news was bad for newspaper and book sales, which slumped 7.5 per cent.

Ben Jarman, a senior economist at JP Morgan, says it is a sign that people are increasingly buying some gifts, like books, online.

"So, if a lot of people are buying those online from offshore providers as Christmas gifts rather than going into conventional shopfronts to buy them, that's going to turn up as a very big but temporary drag in the numbers, so I think that's where the big downside was today," he said.

Pharmaceutical, cosmetics and toiletries also recorded a 2.8 per cent seasonally adjusted drop in sales.

The previously strong cafe and restaurant sector dropped 1.5 per cent, with takeaway food down 0.7 per cent.

Food retailers also saw weak sales - with specialised food sellers seeing turnover slump 4.6 per cent and supermarkets seeing just 0.1 per cent sales growth, but Australians were still on the turps this festive season, with liquor retailing up 1.9 per cent.

Ben Jarman says household consumption remains in the doldrums.

"This is despite of course a couple of RBA rate cuts which we got over the quarter," he observed.

"So, for a central bank that's watching how the consumer's playing out, this will not give them any sense that the rate cuts so far are resulting in a dramatic boost in household consumption, so there's probably scope for, we think, further easing to come on the basis of these numbers."

However, CommSec's chief economist, Craig James, says further interest rate cuts may do more harm than good for retail sales.

"The interesting point is that retail spending seems to have softened since the Reserve Bank started cutting rates in mid 2012, not accelerated," he wrote in a note on the data.

"Given that there are more term and "other" deposits in the economy than owner-occupier home loans, the people that rely on interest income may have curtailed their spending to a greater extent in response to rate cuts than home buyers have lifted spending."

The poor overall sales result drove the Australian dollar lower to 103.55 US cents by 2:05pm (AEDT), as currency traders increased their bets on another interest rate cut in the next few months.

Longer-term picture

Craig James says, when adjusted for inflation, retail spending over 2012 was actually the strongest it has been in five years.

He says the 3.1 per cent per cent headline growth was below the decade average of 5 per cent, but the weakness was due to lower prices not fewer transactions.

"The bottom-line is that 2012 wasn't a bad year at all in terms of retail spending," Mr James noted in response to the ABS data.

"That doesn't mean that it wasn't tough for retailers. Retailers were forced to trim margins and cut prices to move stock, but generally it worked; growth in spending was faster than the average growth pace recorded over the past five years."

Mr James says, when price reductions are factored out, many retail sectors enjoyed a bumper year of sales growth, with a 1.9 per cent increase in the number of goods sold at department stores the best rise since 2007.

"Supermarkets also recorded the best real growth in spending in eight years – growth of 4.3 per cent in 2012 was the strongest since 2004," he observed.

"Specialised food outlets like butchers and fruit and vegetable shops recorded the strongest calendar year growth in five years (5.3 per cent real growth); electrical good retailers had the best year in four years (6.2 per cent growth); and pharmacies recorded the strongest growth in three years (10.3 per cent)."

However, while strong real growth indicates consumers are still buying goods, the fall in prices for many products and services has reduced profit margins for a large proportion of retailers.